Today’s Key Market Drivers: 27th August 2019

One analyst sees the potential for a monster sell-off this week.


A well known Nomura Investment bank analyst says a monster sell-off this week could occur. He says a “Lehman like plunge” could happen in coming days and is sticking to his prediction. According to CNBC Masanari Takada says “The U.S. stock market especially is facing its greatest test of the year thus far,” Takada said in a note to clients on Monday. The low sentiment is poised to prompt “panic-selling by fundamentals-oriented investors and systematic selling by trend-following technical investors along the way.” CNBC says. He had predicted the first explosion in the CBOE Volatility Index, aka Wall Street’s “fear gauge,” which swung to the highest in 2019 on Aug. 5 when China allowed its currency to drop to a level unseen since the financial crisis amid the trade war.

Takada went on to say. “performance over the past two weeks showed an ‘uncanny resemblance’ between now and 2008. Technical investors including Commodity Trading Advisors are already trimming their long positions ‘at an accelerating pace,’ which could exacerbate selling going forward, Takada said. CTAs are trend-following quants that trade futures contracts and commodity options. “The correlation between sentiment then and now remains quite high,” Takata said. “Even the passing risk-on phase after the initial shock of the yield curve inversion … and the risk-off mood that struck on 23 August neatly track the pattern recorded in 2008.” “If this uncanny resemblance between the two patterns continues to hold, sentiment could soon fall to a level not seen since December 2018,” he added.

US Durable Goods beats market estimates.


The latest US Durable Goods number smashed market estimates when released on Monday. US Durable Goods are items that are supposed to last more than 3 years, such as white goods, furniture and electronics. It’s retail sales number of big-ticket items and July’s figures showed US consumers were still out buying big-ticket items and are not yet slowing their spending in fear of a recession. The Durable Goods number backed up Jerome Powell’s comments last Friday that the US economy was doing well and whilst the Fed did cut rates last month it was only a mid-cycle adjustment and the economy does not necessarily need further rate cuts.

The data helped boost the US Dollar on Monday which was already benefiting from comments made by the US President on trade talks with China resuming.

Trump says China called his team wanting to start trade talks again. Chinese officials say they are not aware of any new call to Trump’s team.


Just prior to the close of the Asian trading session on Monday Donald Trump announced that China had called his trade team and was willing to come back to the negotiating table and talk trade. Trump said. “China called last night our top trade people and said ‘let’s get back to the table’ so we will be getting back to the table and I think they want to do something. They have been hurt very badly but they understand this is the right thing to do and I have great respect for it. This is a very positive development for the world.”

Financial markets jumped higher with the Aussie Dollar gaining strongly on the potential ratcheting down of the current trade war between the world’s largest economies. However, not long after Trump’s announcement, a China official said: “We have no record of such a call.” CNBC reports this morning. Global Times Editor-in-Chief Hu Xijin said in a tweet that negotiators from both countries did not talk over the phone, adding: “The two sides have been keeping contact at a technical level, it doesn’t have significance that President Trump suggested. China didn’t change its position. China won’t cave to US pressure.”

Whether the Chinese rang the White House or not safe-haven currencies fell and stock indexes rallied. Monday was a classic case of “buy the rumour, sell the fact.”

Remaining consistent in your approach.


The global economy isn’t on its knees just yet, but it’s bending over and getting ready to put one knee down in the coming 6 months. The USA triggering off a trade war with China has come at the end of a long-term debt cycle that has built up over the past 10 years since the global financial crisis. The world is deleveraging and an example of this is the recent fall in house prices in both Sydney and Melbourne and the lowering of interest rates at the RBA and other Central Banks around the world. The headlines are saying things like “a recession is coming”.

When you have the two largest economies in the world fighting over trade tariffs and intellectual property rights it simply adds to the downward pressure on financial market sentiment. So, should this be a time when you adjust your trading plan? If you have not been making meaningful money then I would suggest the obvious answer is yes! However, my trading plan will not change in the coming 12 months. I will remain steadfastly consistent with how I trade my setups, the plan worked extremely well in 2018/19 even having to contend with the odd market-moving Tweet from the US President. I will not allow my plan to get sidetracked by financial entertainment and this is the challenge for all traders. They often allow themselves to be sucked into trading when they see big headlines and market moves.

Trading success is no different from success in business or sport. First, you need to show up and whilst showing up is one thing being consistent in your behaviour is another and knowing when to tweak the plan comes with experience. Managing risk whether its trading, business or sport is the same. You need to accept failure is going to happen, but you need to ensure you fail gracefully and you fail consistently the same way in terms of your risk. You cannot afford a major wipeout.

My message this morning is about consistency and being resolute about your approach to it. Don’t get sidetracked, don’t worry about what everyone else might be doing or saying, do your thing, manage risk consistently and when the plan says trade, trade.

Get ready for an extended period of volatility.


What appears obvious is the likelihood of an extended period of market volatility. The Australian Treasurer was on TV this morning telling investors to “get use to it”. Investment banks UBS and Morgan Stanley this week wrote to clients telling them. “The global economy would fall into recession if the U.S. raises tariffs on all imports from China to 25% and Beijing follows suit.” “With talks between the US and China dominating market moves over the near term, investors should brace for higher volatility.”

What investment banks are telling their clients is to get ready for the next downturn in the global economy and don’t over-leverage yourself as trouble waters are ahead. I will continue to remind LTG GoldRock members of the importance of following what Central Banks are doing when it comes to interest rates as it is a give away to what the global economy is likely to do in the coming 12 to 18 months.

When you have every major Central Bank in the world lowering interest rates it’s a signal, they expect a continued slowdown in the global economy. This means company earnings fall, stock prices come under pressure, fixed income demand rises, housing prices stall, wages stall, unemployment rises and people slow spending.

The odds are we will see some blue chip shares come under pressure in coming quarters and they will eventually trade down to major previous lows. The crowd will likely be selling, blood could be on the streets, and this is exactly when you need to be buying quality blue chip stocks.

UBS Wealth Management Global chief investment officer Mark Haefele told CNBC recently.


“With talks between the US and China dominating market moves over the near term, investors should brace for higher volatility. We believe it is prudent to take action to neutralize part of this event risk,” he wrote. “As a result, we are reducing risk in our portfolios by moving to underweight in equities to lower our exposure to political uncertainty.”


The trophy is earned in the hours nobody is watching.

AB

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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